Yahoo Finance I’m a Tax Expert: Here’s Why You Should Prepare for Your Taxes All Year Long
Whether it makes you cheer or groan, it’s tax season! Over the next several weeks, Americans will scramble to prepare and file their tax returns, hoping for a refund (or praying they don’t owe additional money). But, once they hit “submit” on their electronic return (or drop the paper form in the mail), most filers will let out a sigh, wait for their tax refund (or pay their bill), and forget about taxes until next year.
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If you fall into this group, you could be making a costly mistake. When you view tax preparation as an isolated event rather than an ongoing process, you may end up paying more tax than necessary.
We spoke with several tax experts about year-long tax preparation, who shared why you should think about taxes more often. They also offered practical tips to make tax preparation painless (or at least less painful).
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Tax Prep Is Treated Like a To-Do List Item
Before we dive into why and how you should look at taxes as an integrated part of your finances, let’s explore why more people don’t do that.
Mark A. Luscombe, certified public accountant (CPA) and principal analyst at Wolters Kluwer Tax & Accounting, said, “I think that, for a lot of people, taxes play a secondary role to other issues in life. Many taxpayers, I think, view the tax return preparation process as such an unpleasant experience that, once they have their tax return filed, they do not want to think about it until the next filing deadline.”
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Tax Prep vs. Tax Planning
Atiya S. Brown, CPA and owner of The Savvy Accountant, wants taxpayers to understand the difference between tax preparation (a standalone event) and tax planning (a continuous process). Brown believes effective tax preparation helps you stay compliant with tax law and is a “puzzle.”
“The pieces need to be put together, but we know what the picture [looks like] because the year is closed. [On the other hand], tax strategy is like a blank canvas where you decide what topics you can strategize about throughout the year to make sure you are getting the tax savings you need,” she explained.
How To Gear Up for Tax Day Throughout the Year
Follow these 11 steps to engage continuously in the tax planning process.
Adjust Your Tax Withholding
Jeff McDermott, CFP and founder of Create Wealth Financial Planning, LLC, said, “If you have a regular W-2 job with withholding from each paycheck but find yourself owing a big tax bill every year, look at adjusting your withholding. The IRS has a withholding calculator that allows you to use a recent pay stub to forecast how much withholding will be done for the year and gives guidance on adjusting your withholding up or down based on your anticipated tax bill.”
He continued, “The goal here is to avoid that unexpected tax bill that can derail your savings plans or zap the emergency reserve. Doing this earlier in the year helps give you more time to make smaller adjustments, but don’t forget to factor in bonuses or income that might come later that isn’t a part of your regular paycheck.”
Pro Tip: You should also consider your tax filing status throughout the year. For example, taxpayers who recently lost their spouse may need to prepare for the survivor’s penalty.
Get Organized
Marguerita Cheng, CFP and CEO of Blue Ocean Global Wealth, encourages you to, “Organize your [tax-related] records throughout the year. This can help you be proactive and better manage expenses. By staying organized, you won’t overlook any important tax deductions or credits.”
Pro Tip: Choose a document storage system that works for you, whether that’s a physical file or a folder on your computer.
Collect Information Continuously
Elliott Appel, CFP and founder of Kindness Financial Planning, LLC, offers some advice for organizing your tax-related documents. Appel said, “I recommend people make a digital file that is backed up to the cloud and as they receive tax documents, scan or take a photo of them, and upload them to the file.”
He added, “For example, if you make a charitable donation in 2024, scan the [receipt] into the 2024 tax folder and consider making a spreadsheet of your total donations. When you prepare your 2024 tax return, you already have a good start on the documents you need.”
Leave Notes for Yourself
A year is a long time, making it easy to forget events that could impact your taxes. Appel suggests, “If something was ‘out of the ordinary’ compared to other years, you could even make a note of it for your tax return file for next year.”
For example, Appel said he did a rollover in 2023 and had issues with the plan administrator not accounting for things properly in the past. “So I put a note ‘Double check 1099-R’ in my tax folder as I did the rollover. I also had to file a final tax return for my dad, who passed away last year, so I put a text file with the subject ‘File final tax return for dad’ in the folder.”
Know Your Numbers
Brown said, “You need to have a grasp on your numbers and know what you are expecting to earn during the year so that you can see your tax return and know if something is missing.”
Keeping tabs on your income is simple if you only work for one employer. However, if you work multiple jobs or have several freelance clients, it may be helpful to keep a running log of the entities that will pay you this year — and ultimately send you a tax document.
Pro Tip: Knowing your income (or projecting it) can help you determine your tax bracket, which dictates how much you pay in taxes.
Maximize Retirement Plan Contributions
Luscombe said, “One strategy to save on taxes is to maximize your qualified retirement plan contributions for the year. This is relatively easy to do even after year-end for IRA contributions. [However], to maximize 401(k) contributions, it is much easier to look at your 401(k) withholding at the beginning of the year and revisit it during the year to make sure the 401(k) withholding from your paycheck is going to achieve the maximum level by year-end.”
McDermott added, “If a Traditional or Roth IRA contribution is part of your plan and you’re used to making the contribution for the previous year when you file taxes, consider monthly contributions throughout the year instead. This will help get the money invested sooner and will help make savings a regular part of your monthly habits instead of a once-a-year scramble to fund a contribution.”
Maximize Tax Deductions and Credits
Many taxpayers take the standard deduction when they file their returns. However, through tax planning, you may discover that it pays to itemize your deductions.
Luscombe said, “If you are thinking of trying to have your itemized deductions exceed your standard deduction every other year through bunching, [it] requires planning throughout the year to get your charitable deductions lumped into every other year and perhaps even to get elective surgery lumped to every other year to maximize the medical expense deduction.”
He added, “Many tax deductions and credits are also better utilized with year-long tax planning. For example, if you decide to make energy-efficient home improvements, keep in mind the new $1,200 annual limit on the credit for new windows, doors, energy audits, and other energy-efficient systems. It is much easier to plan those improvements throughout the year rather than suddenly be in a rush at year-end.”
Make Estimated Quarterly Payments
“If you’re a business owner or do not have a regular paycheck with tax withholding, make quarterly estimated tax payments. By making quarterly payments throughout the year, you avoid the penalty that can accumulate for underpaying taxes during the year, and more importantly, you’ll avoid the shock of a huge tax bill due all at once in April. If you haven’t been setting money aside during the year for this, you might struggle to come up with the necessary funds,” McDermott explained.
Automate Your Accounting
Freeman Linde, CFP and tax advisor at La Crosse Financial Planning, offered another piece of advice for entrepreneurs and the self-employed.
Linde said, “Automate your accounting. If you have self-employment or small-business income, using personal budgeting software like You Need a Budget (YNAB) for your business can automatically import and categorize all your transactions throughout the year. A simple export to your tax planner at the end of the year is all you need.”
Work With a Professional
Brown said she’s not against taxpayers taking the DIY approach when filing their tax returns or implementing tax planning strategies. However, she cautioned, “If your situation has anything that changes or there are any tax law changes, you may need to work with a trusted professional.”
Linde suggests partnering with a full-service financial planning or advisory firm. He said, “They can pull tax forms for you and know so much about your life that their tax questions are minimal. There is no coordination between advisor and tax preparer needed in the spring because they are one-in-the-same working with you throughout the year.”
Plan What To Do With Your Refund
It’s wise to figure out what you’ll do with your tax refund before you get it. That way, you can put every dollar to the best use.
Most Americans pad their emergency funds or pay off debt with their tax refunds. But, if you’re already on solid financial footing, you may want to consider investing or splurging to fulfill a lifelong dream.
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This article originally appeared on GOBankingRates.com: I’m a Tax Expert: Here’s Why You Should Prepare for Your Taxes All Year Long
